How does digital technology make lending to farmers more viable? (early findings)

Published on

October 4, 2016

The Learning Lab is researching the Business case for digitally-enabled smallholder finance, specifically: what role do digital tools play in successful business models for lending to smallholders?  Here we provide early findings from the research, in the form of a presentation from a Sep. 2016 workshop where Dalberg and the Lab discussed the results with MasterCard Foundation partners and selected financial and digital service providers.  In addition to the presentation file, the blog below highlights a few preliminary findings. For the full Learning Brief click here.

The Business case for digitally-enabled smallholder finance is concerned with how digitalization can enable financial service providers (FSPs, broadly defined) to more profitably and sustainably serve small holder farmers.  The goals of the research to date have been:

  • Build an initial knowledge base of the current and projected use of digital tools by FSPs serving smallholders
  • Begin to explore the impact of digitalization on the financial performance of FSPs
  • Identify key constraints to digitalization and areas of opportunity to accelerate digital integration
  • Identify requirements for building out a more robust business case for digitalization over the coming years 

The study combined extensive desk research with, expert interviews and a long organization-level survey of 23 providers (selected from Foundation partners) that have begun their digital journey – that is, at least partly digitalized delivery of financial services to smallholders.  We are interested not just in digital end products, but digitalization across the whole of FSP operations.  For specificity and comparability we focused on the value chain/operational steps to deliver credit products.

The workshop discussions validated the broad findings of the study, suggesting that additional investment into the business case for digitalization could benefit the smallholder finance community, while highlighting additional challenges and opportunities for digitalization.

How are FSPs digitalizing?

Within our sample, the most common area of digitalization was in loan analysis (in various forms), but we observed some firms, including those we labelled “high-tech banks” and “niche NBFIs”, digitalizing across operations from customer relationship management to delivery of support services (non-financial services like information and training).  The figure below illustrates the prevalence of using digital tools/systems along the lending value chain

Level of digitalization across lending value chain by organization

Effects of digitalization on FSP performance

Although it is generally still early to tell, there are signs that going digital is related to improving financial performance.  The providers in our survey that were more digitized were also more likely to report that loan revenues did or would soon cover their costs.  And 83% of all respondents expected digitalization to reduce the cost to serve and/or increase their portfolio quality.  One bank explained, “Digital tools can help us identify, classify, and assess farmers better prior to lending. This will reduce our credit risk.”

Perhaps surprisingly, and encouragingly for those who want to see greater reach of this sector, the few providers who have measured the impact of digital tools saw more value from increasing the addressable market than from reducing costs to serve (see figure below).

Impact of integrating digital tools for firms who have measured it (# of respondents by type)
Business case for digitally-enabled smallholder finance

Barriers to digitalizing smallholder finance

Going forward, players intend to increase digital uses across the lending value chain, with a slight preference for digitalization of cash flows and loan analysis.  However, survey respondents voiced challenges around digitalizing smallholder finance that were related to high upfront costs, difficulty with change management, and lack of internal capabilities (see figure below).

Barriers to digitalization (number of respondents out of 23 by digitalization profile)
Business case for digitally-enabled smallholder finance

We interviewed digital service providers (DSPs) who work in different ways to help FSPs digitalize or to provide complementary digital products.  The challenges that DSPs described in partnering with FSPs often echoed the challenges cited by the FSPs themselves:

  1. High upfront costs: The high upfront cost of building digital tools and processes challenges DSP ability to sell products to FSPs. The cost burden is highest for low volume players and those that do not already have digital processes in place as it requires organizations to create entirely new infrastructure and processes to adopt new tools.
  2. Lack of internal capabilities: Traditional MFIs and less tech-savvy organizations lack the internal capabilities and capacity to implement, integrate and manage digital tools. They require integrators who can work closely with them to digitalize their core banking systems before moving to other functions along the lending value chain.
  3. More proof of value required: Risk-averse commercial banks require proof of impact on profitability/portfolio quality before investing. Proving the business case is particularly challenging in a nascent field where profitability data has yet to be collected.
  4. Lack of digital literacy: The value of digital tools is likely correlated with digital literacy of the end customer. Going cashless is particularly expensive in underdeveloped mobile money ecosystems because customer education is critical but can also be costly. Additionally, digitalization of support services is particularly challenging with less tech savvy customers and therefore, will continue to require human interaction.


Opportunities for providers and donors

Early findings already suggest a number of opportunities to use digital tools to serve smallholders more effectively, or to catalyze progress in digitalizing financial service operations.  A few are listed below:  

  • Financial service providers: (1) Make digital products more customer centric; (2) Partner to incorporate additional sources of alternative data for loan underwriting; and (3) Track the performance and financial return of investments in digitalization
  • Donors, capital providers, and market platforms: (1) Support the “digitizers” and/or partnerships between “digitizers” and FSPs; (2) Help improve smallholder farmer digitalization/digital literacy; (3) Invest in the sector’s institutional capacity for digitalization and nurture digital savvy talent; and (4) Explore digitization of low-tech models that reach large numbers, e.g. VSLAs, SACCOs 
  • Digital service providers: (1) Find innovative ways of sharing risk with FSPs, (2) Invest in building the case for FSPs to use digital services; (3) Offer customized and flexible products adaptable to the changing needs of FSPs; and (4) Partner with other DSPs to provide integrated digital offerings across the value chain

For more information download the full Learning Brief here.  In addition, as the Lab continues to chart a path for future research on this topic, we invite feedback (use comments below, Tweet @RAFlearning, or complete a contact form) on what knowledge, analysis ,or tools are currently missing from the landscape that could help providers better understand or take action on digitalization to improve their performance in serving smallholders.



Workshop presentation

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